USPAP Question About Value Estimate In Relation To Recent Sale

[George Hatch]

We went through all this during the last bust and your perspective ended up being overtaken by events and disproven by the facts on the ground. The entire market in many areas did decline as a direct result of the principle of substitution acting in concert with the supply of REOs and shorts.

Yeah, the disparities you're citing for your market didn't occur in *either* of the previous RE busts in my region. Not by the time the REOs and shorts were a major factor in the market. Nor was it any different in the non-residential sectors, not that you would have any familiarity with them. Trust me when I tell you that non-res buyers and sellers are even less emo about their losses during an economic downturn.

I freely acknowledge that everything may have been exactly as you said occurred in your region; it's too bad you can't acknowledge the same for my observations in my region. The difference between the two markets only underscores the point I have been making all along - the immutable principle only exists as such to the point that it applies consistently and more/less all the time. If there can be exceptions then it isn't a fundamental, it's something else.

 

[J Grant]

I'm not taking such a hard stance as to not include any market movement due to the current atmosphere variances of the current occupied owners...but when you go so far as to allow abnormal to become the benchmark for normal and the normal to be abnormal, you defeat the whole purpose. For example, REOs encompass 55% of the market and sell 15% lower than the typical occupied homeowner. So now, under your "living breathing" interpretation of "typical", therefore the homeowners are now atypical, so now all of the people selling their homes will have to be adjusted 15% to reflect the 'typical seller" which are REOs. All of your deals will be killed or they have to adjust their prices to match the REOs, which have other influences affecting the price.

Problem 2 now appears: REOs can only sell if they price their vacant homes lower than what Joe is selling his house. So you adjust the sale, and they have to sell 15% lower. Oh, dear....now the REOs have to adjust their sale price again because the occupied sales are now 15% lower...so they lower their prices 15%. Oh dear...now we have to adjust those dang atypical homeowners again...and round and round we go...right down the toilet.

They have liquidation value for a reason. If you have a house that is an REO and they want to know the most probable price for a house under distressed selling conditions like an REO, give them that kind of value. If they want market value, as defined by FNMA, then remove the REO selling conditions and show them what a home occupied sale would sell for. If they end up being the same value, I have no problem with that.

The "REO selling conditions" are a fabrication in your own mind! If an appraiser uses an REO home as a comp, the home was listed on MLS or otherwise exposed to the open market. The lender contributed no special financing or terms, so where is the imaginary "REO selling conditions" ? A distress sale from bank in an auction or sheriff sale is not a MV comp . LV and DV have specific restrictions on market exposure time , a compulsion to sell within that very shortened time and limited advertising or listing effort, none of which is true of the REO home put on MLS. In fact a number of lenders will have agent put on MLS listing, no investor bids considered till after 21 days on the market, to give enough time for "regular " buyers to get it first.

"normal " is not an appraisal definition for MV- you have no problem with "abnormal" high prices or builder sales selling above non builder sale, only a self imposed benchmark around normal when it comes to REO sales...inconsistent.

 

[residentialguy]

The "REO selling conditions" are a fabrication in your own mind!

Then you are simply clueless as to the selling conditions of a REO.

For starters: They never wanted that house. They can't occupy that house. They can't rent it. They have to sell the house. That house is just sucking money from them without any benefits. It is an as-is sale. They won't accept contingencies. They can't even make a profit on that house if they wanted to.

 

[J Grant]

Then you are simply clueless as to the selling conditions of a REO.

Fill me in on the REO selling conditions I am clueless about then....(for an REO listed on MLS)

In my area at least and a number of other areas I speak to agents or appraisers about, an REO when listed on MLS has same terms of sale as any other property- they are offered to a buyer, a buyer is allowed to do a home inspection, buyer makes an offer goes to contract pays cash or gets a loan . ( exception is Fannie Mae homepath which offers their own financing and Fannie repaired REO homes often sell for higher)

I agree REO sales can sell for lower but there are many, many reasons why that may be, in my experience those reasons are about the property physical condition or a market cycle or who typical buyer is as investor but not about "REO sale conditions"

 

[residentialguy]

The entire market in many areas did decline as a direct result of the principle of substitution

The principle of substitution requires equivalent substitute property that has the same use. They have to be on equal playing ground.

Does a glut of lower priced REO's affect market value? Absolutely it can. The sales of those other people selling their homes will reflect that.

 

[residentialguy]

Fill me in on the REO selling conditions I am clueless about then....(for an REO listed on MLS)

I did in my edit of that post.

 

[residentialguy]

I agree REO sales can sell for lower but there are many, many reasons why that may be, in my experience those reasons are about the property physical condition or a market cycle or who typical buyer is as investor but not about "REO sale conditions"

Like I stated above: If they are selling for the same price and end up being the same value, I have no problem with that; that's what the most probable price the homeowner could sell his/her house for.

 

[J Grant]

Then you are simply clueless as to the selling conditions of a REO.

For starters: They never wanted that house. They can't occupy that house. They can't rent it. They have to sell the house. That house is just sucking money from them without any benefits. It is an as-is sale. They won't accept contingencies. They can't even make a profit on that house if they wanted to.

Those are seller motivations, not "REO terms of sale"

Keep in mind in the market, especially in a declining market, any individual home owner can have the motivations you describe...a HO facing BK or behind on house payments has to sell, (most sales of even regular houses are as is), and a HO underwater can't rent to cover costs and a HO facing BK or foreclosure cant' rent their house either. A homeowner under water there is no profit to be made.

True a bank can not keep profit from an REO but bank still has motive to get a better price if possible, to be whole on the mortgage and pay down legal and holding costs incurred.

In the worst days of the crash some lenders undersold properties that were REO but I see far less of that now.

 

[residentialguy]

Those are seller motivations, not "REO terms of sale"

Keep in mind in the market, especially in a declining market, any individual home owner can have the motivations you describe...a HO facing BK or behind on house payments has to sell, (most sales of even regular houses are as is), and a HO underwater can't rent to cover costs and a HO facing BK or foreclosure cant' rent their house either. A homeowner under water there is no profit to be made. IT sis true a bank can not keep profit from an REO but they would rather get a hider price to be whole on the mortgage and pay down legal and holding costs incurred.

I agree. And if a HO is facing such problem, those motivations might be affecting the price and should be adjusted if it affected the price, just as an REO should be adjusted.

 

[J Grant]

I agree. And if a HO is facing such problem, those motivations are affecting the house and should be adjusted if it affects the price, just as an REO should be adjusted.

Sometimes yes, other times no.

When the predominant market has many sellers with those same motivations, those motivations should not be adjusted for up to meet an appraiser imposed ideal that MV means a house should get a higher price. House prices reflect the market cycle they are in.

Most probable price means most probable, whether high, low or mid range, for a subject property considering the market cycle ,likely buyers and competing sellers for that property.

Even if a homeowner themselves does not have distress motivation but they are selling in a distress market cycle, they would have to lower their price to meet the other lower prices to get a buyer. That, or sit out the market.

Do you think all those homeowners who go into default or short sale did not first try to get a higher price? Usually they do, but face the reality the market wont pay a higher price. n fact for a short sale many lenders require the house be put on MLS first for a period of months to see if the house can get a better price.

You are resistant to adjusting a higher price down on a multiple offer sale or builder over charge, yet believe as an across the board adjusting "up" prices resulting from motivations affecting lower .